MaxedOutMama

Saturday, February 28, 2009

Joy's Question About Consumer Credit

Joy's question was:

How much would it cost for the government to pay off the unsecured consumer debt of every American?

Would it cost more than this bailout?

The primary source of data here is the Federal Reserve's G.19 report. G.19 covers non-RE consumer credit. Now not all of that is unsecured. The bulk of it is secured, such as car loans (but somewhere around 25-30% of those are underwater). Technically, a loan that is secured by collateral can be partially unsecured if the value of the collateral is less than the loan balance. However, I think that is not what Joy meant.

Revolving credit (credit cards) is unsecured debt. This report gives numbers in the billions, and as of December, there was 994.4 billion in revolving debt. That is just about a trillion, which is considerably less than we are spending on the total bailout.

The stimulus bill alone is close to that (800 billion), but the money being pumped into banks, and into the agencies, used to buy stock in companies like Citi, and pumped in by TARP is far more.

So the answer to the second part of Joy's question is no, it would cost much less.

However, while paying off credit card debt would inject a huge stimulus into the economy, and would immediately dump a lot of cash to investors and into the large banks, it wouldn't take care of the bad mortgages.

I am, however, of the opinion that the best way to handle the bad mortgages is to let the servicers rewrite them where the investors agree, and otherwise let them default. I can see the point of the government funding the agencies (Fannie Mae, Ginnie Mae) to cover bad debt, because a lot of that bad debt arose from Congress pressuring the agencies to cover banks' bad mortgages.

But the bottom line is that you cannot sustain housing values by continually rolling mortgages. Housing values were inflated out of all rational proportion to homeowner incomes, and so prices must come down. It doesn't make sense to spend 500 billion or a trillion only to produce a slower rate of drop in home values where they were overvalued.

Now, the next logical question to ask is whether this would be more beneficial than what we have been doing. Here is some reference material for anyone who is interested in that question.

The latest data for total mortgages outstanding is in the Dec 08 Statistical Supplement, which has totals for mortgage debt outstanding through Q3 08.

For single-family, total mortgage debt outstanding was 11.16 trillion. For multi-family (condos, etc) the total was .89 trillion. So you can see that it is impossible for the government to do much with that debt.

For TARP (Troubled Asset Relief Program), the latest transaction report (10 pages, pdf) is here. The injection of capital into financial institutions (purchase of preferred stock or warrants) has so far cost 193.6 billion. However there is some value to the stock, so this is not simply money gone. There were additional expenditures. AIG got another 40 billion. The automotives have so far gotten 24.8 billion. A lot of that is just in notes. Citi & BofA got 20 billion each in a separate transaction, for a total of another 40 billion. Treasury got preferred stock in exchange. Then Citi got another 5 billion in the form of a guarantee. Not included in this report is the latest Citi deal, which is a bit complicated and is described in this article.

We have been throwing a lot of money at the problem. The next initiative is coming in the form of CAP (Capital Assistance Program). You can see the details at the Treasury page detailing the major initiatives on this page. The white paper explaining CAP (4 pages, pdf) is here. CAP is aimed at 19 large institutions with assets (loans) over 100 billion. These institutions are required to participate in the stress test. If they fail:

The capital provided to eligible banking organizations under this program will be in the form of a preferred security that is convertible into common equity2. Market participants pay particular attention to common equity as a measure of health in stressed environments, and regulators have long believed that common equity should be the dominant component of a banking organization’s highest quality forms of capital. The convertible preferred security provided through the CAP will serve as a source of contingent common capital for the firm, convertible into common equity when and if needed to retain the confidence of investors or to meet supervisory expectations regarding the amount and composition of capital.

The CAP instrument will be designed to give banks the incentive to redeem or replace the government-provided capital with private capital when feasible. Finally, with supervisory approval, banking organizations will be allowed to exchange their existing TARP preferred stock for the new preferred instrument. The CAP is open immediately. Eligibility will be consistent with the criteria and deliberative process established for identifying Qualifying Financial Institutions (QFIs) in the TARP Capital Purchase Program (CPP).

This will be pretty expensive, although eventually the government should get a lot of its money back. But this type of money would be spent regardless of any other stimulus program, because these "Qualifying Institutions" are ones in which the stock prices have collapsed and further hefty losses are pending, so these institutions have no way to raise money.

All of the institutions that got money originally under TARP didn't need it - the idea was that shoving the money into these institutions would help the general economy by preventing banks from calling loans. Now we are down to funding the bad banks.

Friday, February 27, 2009

Yoicks! Tallyho!

I was going to write a long post about preliminary Q4 GDP, but it is ancient history by now. Still, an annualized -6.2 is pretty rough. Because the imputations become less reliable during times of rapid change, the GDP revisions become much greater.

Still, the reason this is pretty irrelevant is that we now have a huge immediate crisis on our hands. BofA and Citi got a major head bonk and are reeling around with concussions, we can't sell mortgages to anyone but the government without a government guaranty, and we still haven't figured out how to actually produce a meaningful stimulus or shore up these two banks, which have together over 20% of the economy. Right now we're gutshot.

Beginning the second week of January, I spent three solid, hefty, factual, statistical filled weeks trying to construct a low bracket and a high bracket for potential US economic trajectories over about the next 15 months. All that work is completely useless now, because current events have shifted the economy out of any consonance with prior trends, which were showing the glimpses of recovery. After the last two weeks, a depression like event is unavoidable.

The major question now becomes how the voters deal with this, and whether the voters can get the Critters to act responsibly in a genuine crisis. Therefore, I think the questions Shrinkwrapped is asking in this post have more to do with our economic future than anything else. He has asked for comments and will hopefully post his own take on the questions later today:

Discuss among yourselves: Are Barack Obama's exaggerations and outright falsehoods the typical stock in trade misstatements of politicians, intentional lies, unintentional errors, or something novel to our political experience?

In the prior post, there were some very good comments. This from BarcodeGuy was particularly apt:

As this is going on, the bulk of society is being split into 3 groups:1) Those that over-extended themselves and are insolvent or approaching insolvency. Maybe they're under water in their mortgage, maybe they lost their jobs, maybe they figured that their wages would increase so they could dig themselves out of debt. With the economy deteriorating, these folks are being forced to cut back to survive, in most cases either choosing or being forced into forclosure and re-location. Since they're broke, they aren't going to spend.2) Those that did it right during the 10 years of credit insanity. They lived within their means. Maybe their house is paid off, maybe not, but they planned to be able to make it financially if someone in the family lost a job. These folks are looking at the economic news and maybe their investments and they're not buying anything, because they don't want to lose what they have. They're worried about moving into the insolvent category.3) Those on the lower and upper ends of the income scale. Things aren't changing for them as much. The upper end has lost money, but it probably isn't going to change how they spend or how they live. The lower end is maybe suffering lost jobs and credit problems, but they basically don't have a lot of money to spend anyway, and in current economic conditions, they probably have less to spend.

So that's the economy. And Obama thinks he can fix it all, and accomplish his social agenda too? They're spending massive amounts of money to go back to the way it used to be, but I can't see them getting anywhere near it. Anyway you look at it, GDP is going to shrink big time - I figure somewhere in the 4.8% to 5.5% over the next 24 months.

I think we're toast. But what happens when we can't sell the debt any longer? Not from the big arrow, esoteric level but from the on the ground, day to day living perspective. They can't tax their way out of this. They're not going to be able to grow the GDP with the carbon regulations, higher taxes, and diluting capitalism with the banks and automakers and therefore discouraging private investment. I'm seeing default being the only option. What will we do when our dollars are worthless?

Good question. We will have to live off what we can produce, because we'll have a foreign exchange problem. Importing goods will be monumentally expensive. In short, we'll be veering toward Icelandic territory. But the US does produce quite a bit, especially food, and a weaker dollar would actually assist remaining manufacturing.

This is why the energy question is such a big issue. First, taxing energy as the current administration plans will create a large wave of inflation running through the domestic economy. It's equivalent to a value-added tax. Second, it will cut effective incomes across the board. Third, by refusing to invest in any of the ways in which we can produce energy at a reasonably competitive global price, it ends any hope of redressing our trade imbalance. It is not just the problem that we will be importing a bunch of energy rather than domestically producing it. It is also that by artificially raising energy prices, we weaken our manufacturers' ability to compete in the global market.

Since we are dependent on oil for transport, we will be horribly trammeled. By suspending the oil-shale leases (which would become very viable given the weaker dollar) and off-shore drilling, the current administration will keep us spending all our excess income to import oil.

If these policies are not changed, you don't need to worry about a 5% drop in GDP. You need to worry about a 10-15% drop in GDP over the next 15 years - approximately 1% a year. Think about it.

The nature of economics is that economies naturally rebalance. It is not a pleasant effect, but it is a stabilizing effect. If our effective incomes drop, importing goods becomes too expensive, and domestic manufacturing is stimulated. Plus, the weaker dollar allows our manufacturers to become more competitive on the world market.

The Obama administration's policies on energy thus add up to a longer sequence that repeats the horrendous missteps on banking of the last few weeks.

An emailed question from Joy (since Haloscan has real problems):

Here's a really stupid question.

How much would it cost for the government to pay off the unsecured consumer debt of every American?

Would it cost more than this bailout?

This doesn't seem like a stupid question to me. Let me verify some numbers.

Thursday, February 26, 2009

I Thought Of A Way To Explain It

I am still laughing. Someone emailed an inquiry as to what I thought of Obama's speech. I think only a pyschiatrist can understand it. Here is an explanation of what we heard from a psychiatrist who does understand this, and is apparently one of the few sane men left in NYC.

It is not Obama that is such a fool; it is the electorate that are fools for believing him. And the electorate believes because it wants to believe, not because there is anything credible in what we are hearing. And yes, those of us who voted for Obama are stupid. What we saw is what we got.

Regardless of the dysfunctional passivity of the electorate, our eviction notices are already in the mail. What we heard the other night was just another episode of political Fantasy Island. The man can talk all he wants about $2,500 tuition tax credits; the reality is that the US will be cutting social welfare spending for such nonessentials (not already promised) rather substantially over the coming years, and the US will also be raising taxes heftily on everyone from the lower middle class on up.

It is not that Obama created this problem. Any administration would inherit the same situation. The retirement bulge and steadily expanding entitlement programs have created a massive budget deficit that is baked in and will require massive cuts in government spending for most other purposes.

However Obama does seem uniquely gifted at proposing new, expansive spending programs without even worrying about the already-allocated spending for which we cannot pay. Instead, he proposes these new programs, adds some taxes which don't even cover the new proposed programs, and then throws flour on his face, staggers out of the kitchen with this plate of budgetary Rice Crispy treats, and gives a speech about it. The US public is really enjoying the sugar rush, but it isn't going to last very long.

The numbers behind the, ah, "budget" can be read here. Start with the tables (22 page pdf file). Go to page 5 and look at that chart. The first section is the baseline projection of outlays. The huge budget item (a fact that Democrats don't want to see) is the social welfare spending. That includes Social Security, Medicare, Medicaid, and all other welfare programs such as food stamps, other medical grants, and welfare.

In 2008, the outlays for these programs ALONE are 2.9 trillion. Yes, that is TRILLION. In 2018 the projected outlays for just these programs are just under 5 trillion. Current dollar US GDP as of Q4 2008 was estimated as 14.26 trillion. Thus, we are spending slightly over 20% of GDP on just the entitlement programs. That doesn't include defense, and it doesn't include interest on the deficit.

In 2008, interest on the deficit is listed as 253 billion. In 2018, interest on the deficit is expected to cost 651 billion.

In 2008, the deficit was 459 billion. Now we go to table 1 in the pdf, which shows the proposed spending. The proposed 2009 deficit is 1.7 trillion. In 2010 the proposed deficit is 1.1 trillion.

Now, we can't do this, but a whole lot of people think we can. The reason they think we can is that they think we can tax the rich. I have been hanging out on Democratic Underground, and they all believe we can continue to live the fantasy by taxing the rich. Some are willing to go up to 90% top tax rate, which wouldn't leave the billionaires enough to pay their state, local and property taxes. So let's adopt the DU mindset. We are going to essentially confiscate all the money of our rich people.

Let's just say we are going to use that money to pay the interest on our national debt so that we can keep borrowing. In other words, we won't raise taxes on the rich to pay for our social spending. We'll just raise taxes to pay the interest on our growing national debt so that we can keep borrowing.

So let's go to Fortune's 2008 list of the world's billionaires. You can sort this by country of residence. The US resident billionaires start on page 27. Mind you, these folks are not as wealthy now, but let's play pretend, shall we? It seems to be the only game in town, at least in DC.

So here they are. We'll start by covering 2008's deficit, which is 253 billion. And we'll do it by getting all their money:

Gee! We only had to confiscate money through Alice Walton to cover the 253 billion! There's plenty more left! We've still got pages and pages of billionaires to go. Of course, since we cleaned out ol' Buffet, Gates, and the WalMart fortune, we're already getting into diminishing returns.

Let's skip the next few years. Let's just worry about covering the estimated 383 billion in interest on the deficit a few years from now (2013). From here on, we can just eyeball it. The next four entries on the list have net worths varying between the high 18s and 17, so we'll call it 17.5 each. These four net us 70 billion. Only 310 billion more to go. Working our way down the list, we find the next 3 entries have 16 billion a piece. We'll call it 16.2, so that's 48.5 billion. Only 260 billion to go! Between Ballmer and Johnson, we come up with another 30 billion. 230 billion more to go. Now these chintzy tax cheats are getting to us. The next 5 of these parasites should have worked harder; each one of them is only good for 14 billion. Still, that's another 70 billion. 160 billion left over.

Here is where the future stops being so bright that Obama and Pelosi have to wear shades. The next 15 entries on the list average out at under 10 billion, so we still have 10 billion to cover. Now we go to the next page, discovering to our sorrow that those crappy, lazy, useless idle rich average out around 6 billion each. So we clip off the top one.

But here our worries grow as the bag per billionaire drops astonishing. Now we've got to settle down to the hard work of figuring out how to cover the 2013 interest payment due on the deficit of 447 billion.

The remaining 24 billionaires on that page are only going to yield 144 billion.

Next page: Fortunately the net worths are beginning to decline more slowly. The 25 on this page eyeball at a median of about 4.4. 4.4 * 25 = 110 billion. I've still got 193 billion more to go. Page 31. Median about 3.5 billion. 25 * 3.5 billion = 87.5. 105.5 billion still to go. This is worse then selling Girl Scout cookies as a kid.

Next page (32). I'll call it a median of 3.1. 3.1 * 25 = 77.5. 28 billion left. Next page - 2.65 per billionaire for a haul of 66.5 billion. Made it! And I have about 38 billion left for 2014's interest payment, which is estimated to be 495 billion. We'll call that 450 billion, but at a median of 1.5 billion each, it takes 300 more billionaires, and now I run out of billionaires. I only had 12 more pages left. I pretty much can cover the 2014 interest payment, but there is nothing left over to cover the 539 billion I owe in 2015.

Unfortunately, billionaires do not grow like kudzu. Once you've cleaned them out, you have to wait around a generation for a new crop to sprout.

So this is why I'm laughing so hard. You can laugh with me, unless you are a billionaire. It is over. The jig is up. If we don't pay the interest we can't borrow.

The world has changed. Voters have no excuse for electing Obama and no excuse for applauding him. The man is just the man; a population of people demanding a dream voted for a dreamer.

There is a particular type of patient I often see in the clinic who has arrived there in a particular, predictable way. This patient is middle class and has a history of full time employment but has recently fallen on hard times. He, or she, arrives at the clinic in a state of despair, on the verge of losing their apartments, in serious financial difficulty. Their problems are identified as beginning when they lost their job yet upon further investigation, that is hardly the fill story. Very often they recognized their jobs were at risk long before arriving at the clinic yet could not overcome a type of passivity that led them to behave as if nothing was ever going to change. They could not or would not change their behavior even when their behavior was no longer functional or adaptive. For example, they could see that their company was cutting back, that their jobs were insecure, yet continued going into the office everyday, making only the most vague and cursory attempts to look for alternative work. They felt a lassitude that is inadequately diagnosed as depression but is more correctly thought of as a dysfunctional passivity (which can be attended by depression, of course.) By the time they arrive at the clinic, they would typically be 6-12 months out of work, with no insurance, and thoroughly defeated. Although they are treated as if they are depressed and often gain some symptomatic relief, in reality their dysfunction started well before their depressive symptoms appeared; their problems began when they assumed that nothing would ever change in their lives even as they could see the writing on the wall.

He is a polite man. Too polite. This is us. We are broke, we are the dysfunctional passives.

The intelligent amongst us will hunker down and prepare for the financial axe that is going to fall. There is no way out of this but to tighten our belts. Health care will be rationed. Government subsidies for the middle class must be cut. Taxes for about the top 60% must be raised.

We don't have any time or money for Obama's wonderful plans. He may well pass them, but we won't be able to actually pay for them. It is over.

The much-maligned George W. Bush stumped the country trying to get enough support from the voters to force Congress to confront reality. He couldn't get it. George W. Bush was a better president than this country deserved. That is why he was hated. He told the truth.

Obama is adored because he doesn't tell the truth. The proof is that he is following every Bush policy for which Bush was maligned, and yet that does not change the adoration.

The funniest part of the budget proposal shown is that GDP hardly falls from 2008 to 2009 and is projected to grow in 2010. That is also a fantasy.

Wednesday, February 25, 2009

Laughing So Hard I Can Barely Write

If my life weren't going so well, I'd be depressed about this. But as it is, I can hardly bring myself to give a flip. Yes, the Obama administration just managed to put us into a depression-like event. The "brilliant" moves of the last 10 days or so assure it.

But I just don't care. I know how things work. As long as I have reasonable health, the Chief, and the rest of my family's okay, we'll survive. I'll go where the money is and do what no one else will do that needs doing, and I'll be okay. It won't be easy, but my life has never been easy.

God pity the vulnerable, that's all I can say.

Among the "accomplishments" of the last couple of weeks:

Loose lips sink banks: Geithner plus some jabbering political flacks emulating Schumer just took down BofA and Citi. Citi was already toast, but BofA could probably have made it. Now the taxpayers are in line for a very expensive bailout of these two banks.

Energy: In a trifecta of epic insanity, the Obama administration yanked the oil shale leases, nixed off-shore drilling, and drove the cost of oil up. T. Boone Pickens didn't even have to pay for it, which is good for him, because he's kinda out of cash.

Energy 2: By announcing that the Obama administration is going to regulate carbon, a dagger just got rammed through the heart of farmers, businesses and builders. Yeah, sure, I'm going to write a loan for one of these businesses to expand when I don't know if they are going to be tied up in a two-year permitting process in another couple of months.

Oh, and btw, that hike in energy costs is going to send inflation shooting up again!!!! Oil import costs dropped below $50, but the cost of energy to the end-user is rising.

Mortgage Finance: By announcing various ill-thought-out plans to stiff the investors in mortgage debt, the Obama administration caused major international buyers to decline to buy even agency bonds. Now they want an explicit government guarantee. In other words, Fannie bonds will be Treasury bonds.

Overall: foreigners were flooding into the US dollar because of the impending European crash and the obvious Asian problems. Now that has been cut short.

Then last night Obama's speech proved that this administration doesn't even understand the economic problem. Here it is:

The concern is that if we do not restart lending in this country, our recovery will be choked off before it even begins.

You see, the flow of credit is the lifeblood of our economy. The ability to get a loan is how you finance the purchase of everything from a home to a car to a college education; how stores stock their shelves, farms buy equipment, and businesses make payroll.

But credit has stopped flowing the way it should. Too many bad loans from the housing crisis have made their way onto the books of too many banks. With so much debt and so little confidence, these banks are now fearful of lending out any more money to households, to businesses, or to each other. When there is no lending, families can’t afford to buy homes or cars. So businesses are forced to make layoffs. Our economy suffers even more, and credit dries up even further.

This is, honest to God, untrue. There are some junk banks out there that have problems, but credit is not tight at all. Only junk loans aren't being made, and making junk loans can't improve matters.

What is true is that by blowing up Citi and BofA, there will be a massive curtailment of credit card lending. However you can still get credit from smaller banks, so it is really a movement of credit from one place to another, with the really uncreditworthy individuals not getting credit. That is not an ecoomic problem. No one can make an economy grow by extending bad debt.

For what it is worth, before this stunning series of errors the economy was sliding into the bottom. Existing home sales for December, for example, were rising, and the months of supply had dropped to 9.3 months. But when your "plan" for housing recovery involves having government guaranteed mortgages written for unsecured loans, and allowing the people who get those loans to then go to a bankruptcy court and get those loans written down, thus handing the loss to the investor who bought the mortgage, believe me, investors are going to be in short supply. Who is going to be stupid enough to invest in mortgages that are 115% of the property value ( a declining property value) under these rules? Not me!!! Not Japan! Not China!

Congratulations! You're a slum landlord! ACORN is going to be squatting in your homes to prevent eviction! You get to pay for ACORN's squatting costs too, under the new stimulus bill. It's a beautiful, hilarious thing, but we are going to pay dearly for our entertainment.

Read Obama's speech. This poor man is a BS merchant, but the tragedy is that he doesn't know it. Nothing in his life has ever taught him how to balance the books.

Note: Existing home sales for Jan showed an increase in inventory to 9.6 months from the originally reported 9.3 (r 9.4) months in December. Not surprising because of higher rates. However, sales in the west (i.e. CA) increased 29% over last year. When houses are reasonably priced, people will buy them.

Crude inventories are up 17.2% compared to last year, and total stocks of petroleum products ex-SPR are up 7.0%. Refineries are ramping back on gasoline production, probably because of profitability issues.

Sunday, February 15, 2009

Japanese Q4 GDP -12.7 Annualized

That's a major ouchie.

GDP at -3.3% on the fourth quarter, which is more than 3 times the US drop and more than twice the European drop. The Japanese government dates the beginning of their recession to November 07, one month before the US start date. It would seem that Japan's GDP will end up contracting over 5% over Q4 08 and Q1 09.

The layoffs in Japan are really picking up, so their downturn has some legs as household spending continues to drop. In Germany, retail sales were still pretty good in the fourth quarter, but their layoffs will tend to draw down household incomes in 2009.

Worse yet, Japan needs a decent rebound in either China or the US before it can see much improvement, as last year exports to China surpassed exports to the US, continuing a long term trend. However, China's economy is dependent on exports to Europe, the US and Japan, and since Japanese domestic demand is destined to fall, there is a recursive downward loop here. What has in the recent years been a stabilizer for Japan ( Asian exports countering the effect of a strong yen and weak US sales ) has now shifted to a negative loop.

More background in this article (most figures from 2005). You can see balance of trade figures and more background information at this link, plus varieties of a graph of trade balance.

In the past there has been a good correlation between US trucking stats and Japanese exports, thus trade balance.

Friday, February 13, 2009

European GDP Q4

I feel somewhat subdued this morning. I woke up to news of the Buffalo crash.

European GDP doesn't lift the mood. -1.2% from Q407 to Q408 for a 12 month drop. European GDP fell 1.5% in the fourth quarter. This is much worse than the 90-91 recession. The figures are the same for the 15 and 27 country zones. Industrial production fell 2.6% in the 15 country zone and 2.3% in the 27 country zone. Bloomberg. Eurostat.

The above are quarterly rates. The formula to annualize a quarterly rate is 1 + the quarterly rate, to the power of 4, and then subtract 1, so:

-1.1% annualized = -4.33%

-1.2% annualized = -4.71%

-1.5% annualized = -5.87%.

-1.8% annualized = -7.10%

-2.1% annualized = -8.14%.

Thus Europe is contracting considerably more than the US, which explains why Chinese exports to Europe are falling faster now than exports to the US. This is terrible, terrible news for the European banks, because the expectation for European loan performance is much worse. Dubai is supposedly renegotiating some of its loans.

For the euro region, “we see at least another three quarters of contraction, and we should brace for a huge rise in unemployment,” BNP’s Wattret said. “The ECB will cut by at least half a point next month and may have to consider something even more radical.”

Yeah, I'll say. The ECB has been dragging its feet all through this. They need to try to get out ahead. Cut rates and they should cut fuel taxes. They have to recover income quickly now in old Europe.

Thursday, February 12, 2009

God Forbid Congress Should Have A Copy Of What It Is Voting On!

We're receiving E-mails from Capitol Hill staffers expressing frustration that they can't get a copy of the stimulus bill agreed to last night at a price of $789 billion. What's more, staffers are complaining about who does have a copy: K Street lobbyists. E-mails one key Democratic staffer: "K Street has the bill, or chunks of it, already, and the congressional offices don't. So, the Hill is getting calls from the press (because it's leaking out) asking us to confirm or talk about what we know—but we can't do that because we haven't seen the bill. Anyway, peeps up here are sort of a combo of confused and like, 'Is this really happening?'" Reporters pressing for details, meanwhile, are getting different numbers from different offices, especially when seeking the details of specific programs.

Worse, there seem to be several different versions of what was agreed upon, with some officials circulating older versions of the package that seems to still be developing. Leadership aides said that it will work out later today and promised that lawmakers will get time to review the bill before Friday's vote.

The Old Tried And True

My dog is mostly in the 100s, so I'm baaaaaaack. I have been laughing all morning about Charles' comment on the last post, because in fact, the signs of US economic stabilization (not the bottom, but getting there) are beginning to pop up like weeds.

Retail Sales. There are several significant things about January. First, the weather was not favorable, and anyone who remembers the recent spate of weakening retail sales which were all attributed to snow and ice will get a chuckle out of the fact that retail sales rose this January. It appears that consumers are no longer as frightened of snow and/or the wrong color walls.

Second, auto sales increased, and dealer auto sales increased. Third, the SA retail total increased from December, although it is still 9% lower than Jan 09. Fourth, electronics picked up, clothing picked up, general merchandising picked up, and restaurants & bars picked up. The general pattern is one of recession, but the end to the steep fall in consumer spending. Half to 2/3rds of this is driven by the fall in gas and heating oil prices. The rest is due to the fact that things wear out and the financial conservatives are beginning to spend a bit. Between the two, employed people have a little more money each week in their pockets and they may not be willing to spend recklessly, but they are spending for things that are useful and needed.

The fact that retail sales are stabilizing strongly indicates that we are way further toward the low point of this recession than to the beginning. See this graph of historical retail sales (at the bottom, you might want to click on the extra-large option) and notice the pattern. Retail sales don't have to fall sharply in a recession, but when they do, the end to that pattern means that we are most of the way through. This is the graph of the current series, but it doesn't include today's retail sales report.

Auto dealer reports over the last 6-7 weeks have been basicallyfavorable, showing the stabilizing trend that popped up in this report. We will slowly work through auto inventory and sometime in the second half of this year, auto manufacturers will stop being a downward vector.

Unemployment continues to rise after the trough, so from a consumer perspective, the trough will seem somewhat later. However, as retail stabilizes one big source of layoffs will drop.

Also, a quick look at Treasury receipts shows that the decline in corporate profits is beginning to level out, which of course is correlated to layoffs. This means that the rapid decline sequence (lower sales, lower profits, layoffs, lower sales, etc) is beginning to shade towards its natural end.

In part this reflects changes in composition (January includes quarterly payments for smaller companies). However, smaller companies often lead the end of the recession. The monthly comparison interval is unfavorable to 09, because the last day was January 30th in 09 compared to Jan 31st in 08. Fiscal year 09 began in October.

Household debt is beginning to stabilize, and that is a necessary prerequisite for recovery.

Debt has to stop growing and people have to put a little money aside to generate a meaningful recovery. Any Main Street banker could have told you that, which is one of the big problems with the Congress Critters who are pounding on banks to lend, and our Turbo-Tax challenged Supreme Economic Dictator Geithner, who doesn't seem to understand that the problem is not a dearth of credit, but a dearth of borrowers who can pay it back. Casey Serin is willing to apply for loans all day, but that doesn't mean a bank is going to improve the economy by lending to him. That, in a nutshell, is how we got here. Too many banks stopped asking the question "Can this loan be paid back by the borrower from income?" and started asking the question "What do we believe the assets securing this loan will be worth 3 years from now?"

I can hardly believe that Obama found someone more clueless than Paulson. I would have sworn Paulson was the worst that could be dug up, but no, we have an even more clueless Treasury Secretary, who is too dumb to know the difference between throwing money away and lending it. I was going to seek therapy to help me deal with the shock, but it turns out all the sane shrinks are still attempting to cope themselves. They know insanity when they see it. All the economist are twitching from the sheer, clueless idiocy of the Geithner plan, and all sane economists look at Congress' efforts for the "American Recovery" and observe that the near-term stimulus will be very little, and the debt will hang around. The Congressional Budget Office isn't the only outfit that thinks this will worsen the economy in 10 years. We'd be better off doing NOTHING.

The bottom line is that consumers built up too much debt. It has to be written off or paid down before consumers can spend on bigger items. That's the bottom line, which is why that $13 bucks a week the "rescue" bill is going to generate won't do much.

As I have explained before, we are in the second leg of this recession. The first was generated by a business slowdown, which was corrected for by Fed policy (weaker dollar, etc). The second is the consumer drawdown.

It is absolutely urgent to get the consumer part to stop falling before the business sector starts to be meaningfully impacted by the next leg of the global financial crisis, which is going to come from European banks. It's a very frightening mess. The US has little direct exposure to that debt, but US manfacturers are somewhat impacted by world circumstances. (See Rebecca Wilder for an explanation.) A stable/slightly growing consumer sector will be absolutely necessary to prevent the US economy from sliding into another downturn which would take this recession mostly through 2010.

China is contracting hard and fast, so the entire world needs the US to recover a bit.

Tuesday, February 10, 2009

Another Day Or Two

I'm still futzing with the dog. Saturday I took him back to the vet because he couldn't eat and they said he was in diabetic shock and needed to go to another facility to be hospitalized over the weekend. Said he needed catheter, tube feeding and IV insulin and sugar. I didn't think he would survive that, and the prospect of a dead dog and a huge bill was not inviting, so I am doing it at home. But it requires testing every hour for a while after he eats so I can calibrate the insulin as he comes out of shock and his system starts working again.

It will be another day or so before regular blogging resumes. The dog is doing well and running up and down hills again even though the vet told me Friday that his hind legs wouldn't recover for weeks. When I took him home on Friday he was jack-rabbiting. The dog has developed a marked fondness for the insulin shots. He is still puzzling over the blood sugar monitor, even though he has figured out it has something to do with the shots. So if he's feeling off he flops over and offers up a leg stoically. If he's feeling okay he snorts at me and won't let me have the leg.

I, on the other hand, am feeling my age.

Man oh man, I am sure going to tighten up on my eating habits. This is nothing I ever want to have to deal with, and Type II runs in the family. This is a rotten disease which would have particularly foul interactions with the disease I already have, and Type II is preventable.

Thursday, February 05, 2009

Sorry

Sorry again, dear readers. Between the aged lady neighbor and my sick dog, I haven't been getting any sleep.

I just got back from the vet. They are going to check to see if there's anything they can do, but if not I have to put my dog down today. I'm going to try to catch forty winks, if I can stop the other dog from screaming and crying. She is not taking this well.

Update: Diabetes!!!! Amazing that this wasn't picked up sooner, but no blood test ever showed it before, and the last one was just a couple of months ago. So he may have another chance at life. I'm glad I insisted they do some tests, though I'll be sorry when I get the bill.

Update Again! Rescue Dog has been rescued from durance vile. Everyone at the vet's exclaimed over how wonderful he is - well, he sure wanted to leave badly. He was extremely nice to his farewell committee. Many human diabetics get extreme mood swings, but this dog is too much of a gentleman to show it.

So he's home, and tonight he gets his first insulin shot..... Here's where having been through the medical mill yourself makes things a lot easier. I don't have diabetes, and these tiny little needles look like a cupcake to me. I wish that's all I had to do to myself!

Next up, try to deal with the old lady. I spent half today cleaning the house.

The Floor Forming Domestically In Leading Vectors

Seriously, it is. Someone should explain this to Nancy Pelosi:

After that they should explain to her what constitutes stimulus and what would save those 500 million monthly job losses. Poor lady. She really isn't very bright. Her remarkable string of statements about public policy demonstrate that she may be good at herding representatives and gathering and distributing money, but she has not a single clue about the effects of the legislation she shepherds through. For any sort of quantitative analysis, she seems to operate on about a seven-year old's level, complete with a well-raised child of that age's normal sublime confidence in logic and a controllable world. Fossil fuel bad, natural gas good, thus natural gas is not a fossil fuel.

(Aside for any foreigner who happens upon this: The total population of the US is a shade over 300 million. The workforce is about 150 million. Thus Nancy just held a press conference and confidently asserted that more than three times the US workforce loses their jobs every month. Maybe that's why she believes that contraception funding will stimulate the economy?)

Proof of a stabilizing trend is in NACM's latest report. That is business to business credit, and I give it much more weight than ISM. Treasury numbers are firming up for some categories too. Much more later tonight or tomorrow because I've got to run.

So now we all get to sit around and play with the worry beads while we wait for the Euro implosion. If only we were contending with just our own stupidity (although as our Dear Leadress The Nancy demonstrates, that is an impressive heap of stupidity).

All bets are off. Germany is really hurting now. Everyone knew Spain was a goner (their own leaders are beginning to admit that their economy will shrink in 2009), but Germany's really taking a hit in employment right now.

The problem for the US is that the service side is being stabilized by a flattening downward vector in manufacturing, and as Europe gets weaker, US manufacturing should get weaker. So that would imply a later downward slide in services. That's why we need real stimulus now.

Crude inventories are way high. Crude stocks ex SPR is 17% higher than last year. Gasoline inventories are only 4.4% below last year's levels. Distillate is 9.9% higher than last year:

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased 7.2 million barrels from the previous week. At 346.1 million barrels, U.S. crude oil inventories are above the upper limit of the average range for this time of year. Total motor gasoline inventories increased by 0.3 million barrels last week, and are in the upper half of the average range. Finished gasoline inventories decreased last week while gasoline blending components inventories increased during this same time. Distillate fuel inventories decreased by 1.4 million barrels, and are above the upper limit of the average range for this time of year. Propane/propylene inventories decreased last week by 2.9 million barrels and are in the upper half of the average range. Total commercial petroleum inventories increased by 1.4 million barrels last week and are above the upper limit of average range for this time of year.

Total product supplied over the last four weeks is down 2.8% compared to 2008, but usage appears to have dropped more than that.

Tuesday, February 03, 2009

Ninety Percent Nonsense

You know it is.

The only good news I can see on the horizon is this encouraging study that insulin seems to protect people against Alzheimers, but it appears to be too late for this treatment for our government. It appears that the only thing that can break us out of this tailspin of ridiculous policy will be the electorate. Well, some of that electorate is very rational

Last year — I am talking about just 3 months ago — I thought it was fairly clear that the immediate cause for the financial meltdown for which the TARP bailout was being crafted was the systematic relaxation of underwriting standards that led to large numbers of loans (and their lenders, securitizers, etc) going belly-up. Folks could argue whether this was because of deregulation or greed or government distortions and interventions, but I thought there was not doubt that poor credit judgment and excessively free credit were at the heart of the problem....So Frank and Obama are upset that the bailout of banks that were overgenerous on credit did not include provisions to force them to be more generous with credit?

Texas has grown because states like Michigan and New York kill their business climate. And yet, a Texas liberal refused to hear the truth about taxes and unions while simultaneously lamenting lay-offs at her company. This kind of disconnect is disturbing, but revealing.

What liberals want is a guarantee. She wants no one to ever lose a job. She wants no one to ever to know economic discomfort. She wants the country to have Texas’ economy but tax and unionize like New York and Michigan. You can’t have it both ways. It won’t work, as California is now learning.

18. We're in Central NJ . . . too late for any "news" on it, it seems . . However, keep in mind that Global Warming will bring increasing instances of earthquakes, tornadoes, cyclones --- all that stuff.

Sure. Earthquakes. Global warming-caused earthquakes. In the middle of a rather cold winter in the NE.

The problem isn't that we have the wrong leadership right now. It's that we have no leadership. As Carl carefully reviews in taking a look at the auto union question, our new policies are almost all self-contradictory.

We've got proposals for a stimulus bill that will deliver much less stimulus than last year's bill in the current year. We've got green proposals out the butt, but we are essentially trying to keep our unionized car industry staggering along, when the reason why our unionized car industry can't compete on smaller vehicles is the union labor premium. Green vehicles are smaller, lighter vehicles that have a lower profit margin per vehicle, and those are the vehicles that Detroit can't sell at a profit. When your auto industry can't profitably build those models, you can't keep bailing it out while demanding that they build more of them.

As Coyote notes, you can't fix bad loans that are killing banks while insisting that banks make more loans and lower rates at a time when default risks are increasing rapidly across just about every loan category. Barney Frank needs to get one piece of information firmly lodged in his brain - to a bank, deposits are liabilities and loans are assets. It's not that banks don't need and want to lend the money they have. It's that they don't want to lose the money they have, because then they will have to pay it back from their assets that are still good, thus suppressing lending further to good credit risks.

Demand for loans is dropping. Your conservative people who want to buy something on credit aren't going to spend the money until they feel they're getting a good deal. I know quite a few people with large amounts of cash, but all of them are financially prudent and will not spend until they really need something or until they see a very good deal. These types are well aware of the risks, and even 4% mortgages won't get them to buy a home that they believe will substantially depreciate over the next several years. The reason why they have the money is that they are prudent and cautious, and they didn't participate in the insanity. You are not going to get these types of companies and individuals to abruptly do stuff that seems risky. The banks don't have anything to do with it. The bankers would have orgasms if these people showed up asking for a loan.

The 25-30% of the US population that's significantly underwater in their cars? They mostly will have to pay that off before they buy another vehicle. That's reality. They have to show up with cash to pay off their current vehicle, or they have to wait.

The people who are deeply underwater in their homes are mostly going to lose their homes, and nothing is going to change that. Do we really want to keep them in those homes? I'm with Ramsey Su. I think we don't. Unless the borrower is sure that he can keep the home until they get some margin in it, he would be foolish to keep paying the mortgage on a home that he may well lose anyway.

The reason why the default rate on significantly underwater homes is so high is that most borrowers will experience some sort of life/financial disruption over a decade. Unemployment, medical emergencies, family emergencies, divorces, etc. If a borrower is barely able to pay the mortgage and is significantly underwater, the borrower can't save to carry himself through those emergencies, he can't spend or borrow to maintain the home, and the value of the home depreciates even more than the overall market does. So when those emergencies arise, the borrower has no choice but to default. In those circumstances a pay cut, a few months out of work, unexpected medical bills, etc all become crushing emergencies that usually start a cycle of financial collapse.

All of the above is not news to the mortgage industry. It's more like the Mortgage Law of Gravity. Approximately seventy percent of these loans (borrower is 15% or more underwater now) are going to default over time no matter what anyone does, UNLESS THE LOANS ARE WRITTEN DOWN NOW. So the losses are baked in. You can take the loss now or you can take an even bigger loss later when you eventually foreclose on a house that's had no maintenance done and has depreciated further.

Now, since these loans are bad loans and the losses are real, the idea of having them be marginally adjusted, guaranteed by the government, and reissued is just a way to capitalize the investors. If we are going to do this, let's do it up front by giving banks the money (if they aren't too underwater) and taking stock in return. Because otherwise, we are just accumulating future taxpayer liabilities. And guaranteeing bank debt is just a way to do the same thing (have the government guarantee bad loans). It's not going to work unless the fee paid for the guarantee is very high, and that would defeat the entire purpose.

Let the underlying assets (loans) default per the norm. If we decide to bail out some banks, let's take stock in those corporations. It can come out of the bonuses paid to the top executives. There's room there, believe me. Schumer's idea of guaranteeing assets on bank balance sheets is just handing cash straight to bad bankers. Why would anyone want to do this? There are good, well-run institutions out there. He's really proposing taxing individuals, businesses, and well-run banks to shore up bad bankers. That's insane, and it will produce a long drag on the economy that will prevent recovery.

As loans foreclose and the homes roll back out there, the market will begin to pick them up as soon as the pricing makes sense (and that is already happening), and you will see a bottom forming. For most homeowners (the ones who haven't refied their way into insolvency, didn't overbuy, didn't buy at the top of the market, and didn't buy extra houses as a way of creating speculative income), a long, sustained downturn is worse than letting the markets get to bottom. That's because the rate of life/income disruptions aside from recession-induced ones is pretty stable over time.

A while back I reviewed the history of the worst WWII declines and said that we were on pace to do even worse. If you focus on Asia, that now appears to be happening as I whimper. South Korean exports to China have been falling very rapidly, and exports are 45% or more of their economy. Double digit negative, it looks like.

The problem is world aggregate demand. Japan is the world's second largest economy, and this fall is deep enough that their downturn in domestic demand is going to deepen. Unemployment grew more than 10% in one month - December.

Who is left to buy? The US consumer isn't going to be providing much in the way of increased demand. The hope is that we can get to a point in 2009 when things stabilize for consumer spending. An internal Chinese study suggested that 20 million (about 15%) of the rural-to-city migrant workers have lost their manufacturing jobs there. These people are not "official" residents of their workplace sites, so they are not eligible for job loss benefits and not counted in the official unemployment stats, which were variously estimated to be 6-8 million. They have to go back home if they don't find other work. That is a huge rise in unemployment.

Anyway, the results from S Korea and Japan indicate that the Chinese economy is likely slowing faster than anticipated, and even though China's stimulus plans are pretty large, they obviously haven't kicked in yet. China appears to be in the same spot that the US was during the 06/07 transition. Property bubble ending, consumers not yet clued in, but some industries already feeling significant pain. It will be a long road.

JPM ISM world manufacturing showed a slight move up for January, but the reading was still in the contraction range. US ISM manufacturing also improved from 32.9 to 35.6, which is still a contraction. New orders increased 10.1 to 33.2.

However, current US figures really don't matter too much if the situation overseas keeps worsening. What goes around comes around!

Sunday, February 01, 2009

GA Voter Law Upheld

The NAACP said that between 289,000 and 505,000 voters lacked a driver's license and argued it was "implausible" that all of them would have another form of approved ID.

But the panel of U.S. Court of Appeals Judges Stanley Birch and William Pryor and U.S. District Judge Lyle Strom said the argument fails, mainly because both the plaintiffs testified they could get free photo identification "with little difficulty."

"The NAACP and voters, despite their best efforts, failed to identify a single individual who would be unable to vote because of the Georgia statute or who would face an undue burden to obtain a free voter identification card," the court concluded.